Investment Manager Stands Up for Truth and the American Way

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There's this thing called the JOBS Act that would basically make it easier for small or smallish companies to raise money by giving investors unaudited financials or not having internal controls or just lying to them on the Internet, which is my racket. I've enjoyed reading people really ripping into it*, like Simon Johnson, whose take seems to be canonical, or Yves Smith, whose take is good too but I prefer "Just Open Bucket Shops Act**" to her "Jumpstart Obama's Bucket Shops Act" if we need a sarcastic acronym and, yeah, I suppose we do.

I mostly agree with the ripping, because, like I've said before, either the SEC registration process is necessary to protect investors, in which case it’s especially necessary for smaller newer companies, or it’s not, in which case it’s no more necessary for large companies than for small ones. So fine. But the JOBS Act crowdbuzzwording mania is definitely timely, what with Kickstarter being a thing and the Facebook IPO being the hugest thing in the history of things and also something where people apparently talked about offering shares of Facebook on Facebook because synergies. Anyway it seems likely to me that the widespread desire to loosen securities laws is not driven solely by the desire of businesses to raise capital - since, among other things, as Yves Smith says, crowdmuppeting is a super dumb way to raise capital, and actually come to think of it so are IPOs, kind of - but also by the desire of people who are not quite private equity magnates to get their hot little hands on some shares in their favorite social doodad.

As it stands now, not only can the non-rich not buy shares in Facebook unless they (a) are "accredited investors" ($1mm assets or $200k in income) and willing to get sort of ripped off or (b) just, like, wait a few weeks, but non-accredited investors are also not allowed to even hear about exciting investing opportunities from private companies looking to sell securities. Because it's illegal to sell unregistered securities***, even if you only sell them to rich people, if you've made a "general solicitation" - that is, basically, if you've talked about them in pleasing ways to non-rich people. This is why Bridgewater doesn't advertise on TV, and why no matter how much you want them you can't get Whitney Tilson's market insights unless you are an accredited investor on his mailing list, or a Dealbreaker reader, or a human.

Some people think that's kind of screwed up, in that they think that not being allowed to tell the truth about their investing prowess or prowesslessness, to anyone who wants to know, is kind of a problem what with our whole having a First Amendment that says something about freedom of speech. Apparently one of them is suing! Actually I think they sue about this a lot, but this one is appealing to the Supreme Court and he's got Larry Tribe on his side, who is a serious guy and a Harvard Law professor and argued Bush v. Gore and stuff.

Here's the gist of it:

Phillip Goldstein is an owner/manager of a group of funds collectively referred to as “Bulldog”. ... Bulldog maintained a website that provided information available to any visitor, including press articles and a printable brochure describing Bulldog’s three investment vehicles. A visitor could obtain additional information only after being presented with a disclaimer. More specific information was available through a registration process. In 2007, Massachusetts Securities Division filed an administrative complaint against Bulldog, alleging that Bulldog had offered securities for sale in the Commonwealth that were not properly registered or exempt, in violation of G.L. c.110A, the Massachusetts Uniform Securities Act, and regulations thereunder, 950 C.M.R. § 10 et seq., by means of the communications appearing in the website.

He's lost so far and now he's taking it to the Supreme Court, or trying to, they don't have to take it, but you can read his petition, which presents the main question as:

Whether a state ban on speech by an issuer of unregistered securities to members of the public based upon their financial status violates the First Amendment, where the speech is concededly truthful and non-misleading, and where the state characterizes the speech ban as a “disclosure rule” to further an objective that federal law does not permit the state to achieve directly.

It's just the Massachusetts law, but presumably the same question applies to the SEC's regulations that like prevent Mark Zuckerberg from talking about Facebook or Jim Simons advertising his hedge fund and being like "psych, you can't invest." So if he won here, and don't hold your breath that they'll even take the case, that would be kind of a big deal for a whole area of regulation that basically functions by telling people they're not allowed to tell other people true non-confidential information.

I'm a terrible apologist for the sins of Wall Street and all, but I don't generally go around getting all that upset about how Wall Street regulation is antithetical to basic human rights and stuff, because, y'know, it's just money, man, get over it. But the arguments about securities regulation violating the First Amendment kind of get to me because, yeah, they seem to have a point. You should probably be able to talk about your awesome hedge fund if it is in fact awesome. Again, I wouldn't count on this getting anywhere, but it's kind of fun to see Bulldog trying.

* But not Eliot Spitzer, who may or may not have read the JOBS Act but would like to take the opportunity to remind you that there was a research settlement, yay.

** The tag comes from Gail Collins but read the link in the text too, or read Jesse Livermore about bucketing, and then go ponder total return swaps. Everything old is etc.

*** Here is where my lawyers say "you don't register securities, you register transactions." Shut up lawyers. Later on they'll distinguish between petitioning for cert and "appealing," but you'll know not to listen to them.

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